Benefits and drawbacks of crowdfunding

More than $2 billion has flowed into entrepreneurial and creative ideas through the power of crowdfunding since it started to bubble up in 2008. Since 2012, the buzz around the concept has been staggering, with monthly search volumes for terms like “crowdfunding” rapidly gaining on traditional financing terms like “bank loans.” With all that noise and all those dollars, more and more small businesses are considering getting in on what seems like a golden opportunity.

That includes yours truly. My husband, John, and I invented a product, RingSafe, and successfully funded a Kickstarter campaign in February. Since then, I get tons of questions on ‘how to run a successful campaign’. So many of them, in fact, that I presented some of our lessons learned for UP Summit, a conference last weekend where startup coaches from all around the world gathered to talk entrepreneurship.

Chatting with attendees throughout the weekend, it remained clear that entrepreneurs don’t just need to know HOW to run a crowdfunding campaign, more importantly they need to know IF they should even consider one. Let’s take a look at some of the pros and cons of crowdfunding.

Benefits of Crowdfunding

Beyond raising money, there are a slew of crowdfunding benefits that bear mention because if all you need is money, there are a lot of other, sometimes easier ways to go about getting a springboard investment. Four key benefits of pursuing crowdfunding include:

Market validation

To me, market validation is one of the most compelling reasons to try crowdfunding over alternative methods of raising seed money. When John and I invented RingSafe, we got good feedback from family and friends on our idea and prototype. But family and friends are generally pretty supportive. What we really needed to learn was whether total strangers would be willing to part with their hard-earned money to buy our product. Through crowdfunding, you can set up pre-orders for a concept and reduce the risk of building your first batch. Your success will also tell you whether people care about your idea at all.

Consumer feedback

Not only do you get the very binary validation of whether your idea has legs or not, but you also get access to a pretty engaged community of future buyers who will ask questions, provide feedback, request modifications or customizations that will expose flaws or gaps in your offering. Along the way we learned several things that caused us to update our offer to include both a wide version of our product and offer it both solo and bundled with a chain. Ultimately, once we are fully live and in production, we know we’ll primarily sell as a bundle which is in fact going to be far more profitable for the business. That data is priceless!

Legitimacy and exposure

Though you will do a TON of work and drive the bulk of your own exposure, most of the popular crowdfunding platforms do provide you the legitimacy of having been vetted so that they’ll expose you to their community. And that can be one very engaged community who will help spread the word. For our campaign, about 30% of our traffic and pledges came from within the Kickstarter network or referring links. This included many of our early international backers, who then proceeded to share their find with their friends and networks. Raising funds via more traditional means doesn’t lend you that additional exposure right off the bat.

Funds

Let’s not forget the actual money. What’s good and bad about the funds is that they are typically exchanged for a reward, not equity. Good because you don’t give up any part of your long-term potential gains.

Drawbacks of Crowdfunding

For all its benefits, there are definite drawbacks to running a campaign, not least of which is the fact that all your effort may very well be for naught. About 60% of campaigns don’t get funded at all. And many that do never succeed in shipping their product because they’ve underestimated the complexity or cost in realizing their product.

Some considerations to keep in mind that may put a pall on crowdfunding are:

It’s a LOT of work

Seriously. To do it right, you’ll want to give yourself at least 3 months of prep. You’ll need some amount of initial investment in marketing assets. Also, xpect a 30-day frenzy during which you commit 15-20 hours per week for a team of 2-4 people.

Depending on how much you are looking to raise, if the funds are your only goal, this may not be worth the effort. The average raise in crowdfunding is $5,000. That’s a lot of effort for $5,000. If you aren’t going for a bit larger amount and you don’t need the additional benefits of crowdfunding, you may want to turn back now. Friends, family, debt or a small loan may get you to your seed funding goal more efficiently.

You pay out 8-12% of your raise

Each platform has a slightly different fee structure, but you’re going to shave nearly 10% right off the bat. That’s not to be taken lightly, you really have to budget for it.

Most campaigns fail

As I mentioned earlier, 60% don’t make it. $5,000 is the average successful raise. Of those that do raise, only half make more than 10% over their goal. John and I were fortunate to fit into that camp with a goal of $15,000 and a raise of over $17,000. Keep in mind, that puts us into the top 20% of all campaigns, and it wasn’t exactly a blowout. There are projects like Pebble and Ouya who blow it out, but they are very much the exception and not the rule.

Funds are allocated with little room for growth

Because most crowdfunding campaigns rely on rewards that are effectively an early-bird price for your future product, each dollar brings with it a very real near-term commitment to produce and deliver something. This usually leaves you with just enough funds to cover production, but not enough to grow the business. If you are planning wisely, you’ll want to create some amount of buffer to help keep you going and also identify what your second round of funds will look like if you are in fact successful and decide to grow. In fact, much of our discussion at the UpSummit was ‘what happens next’ and thinking about crowdfunding as the validation and working capital piece that gives you the credibility and proof to go after your next growth round of funding.

Did John and I know all this going into our campaign? Not really. We had already thought through about half of this—and knowing what I know now, we would still do a campaign for RingSafe, we’d just plan it out a bit better.

So how can you decide if you should pursue your own crowdfunding campaign? In my next post, I’ll share a decision tree and some questions that will help you determine if it’s the path you want to take.

Kirsten leads product, content and brand marketing at Bigcommerce, with a growing team of rockstar marketers. Her experience at HubSpot and other tech companies spans marketing, product management, e-commerce and sales. In her spare time, you can find Kirsten and her husband running, cooking and traveling as well as managing their own online, crowdfunded business at www.RingSafe.com. You can connect with her via twitter @kirstenpetra.